Institutions press ConnectEast for a higher bid

Large institutional shareholders in ConnectEast are unhappy with the toll road group’s decision to recommend a 55¢ per share takeover offer and have echoed calls from retail investors for a higher bid.

ConnectEast, the owner of Melbourne’s EastLink toll road, last week recommended minority shareholders accept a $2.1 billion takeover offer from a global consortium led by its largest investor, CP2.

However, some institutional shareholders not in the consortium say the offer is unlikely to be supported by investors at a shareholder meeting in September because it is too low.

“It’s more likely than not that it gets blocked in its current form," one institutional shareholder told The Australian Financial Review.

Investors are looking for an offer closer to 60¢ per share. ConnectEast needs at least 75 per cent of investors who vote (excluding CP2) to approve the offer for it to succeed.

Retail shareholders have also expressed concern over the value of the bid, with former fund manager Greg Perry, who owns 0.4 per cent of ConnectEast, this week arguing the company is worth 60¢ per share.

ConnectEast, which has been meeting with investors to discuss the offer, yesterday said it had received “a handful of calls from retail investors" since it recommended the bid on Friday.

“Generally sentiment towards the proposal, including from major investors and analysts, has been very positive," the company said. The shares yesterday closed at 54¢, having traded at 45¢ ahead of the bid’s disclosure last week.

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CP2 argues retail investors, who account for about 15 per cent of ConnectEast’s stock, are more likely than institutional investors to be reluctant to sell at 55¢ because many bought the stock for $1 in its initial public offering in 2004.

At listing, about 40 per cent of ConnectEast shareholders were retail investors. Institutional shareholders took positions in ConnectEast during the group’s capital raisings in 2008 and 2009.

Still, even institutional investors who bought the stock cheaply when it fell below 30¢ say they believe ConnectEast could demand more money from CP2. ConnectEast’s board squeezed an additional 1¢ out of CP2 after it made an initial offer of 54¢.

ConnectEast argues it has done well for shareholders by delivering them a control premium given CP2 had shown it was a “creeping" shareholder that could gradually build a position of more than 50 per cent.

Tony Shepherd, ConnectEast’s chairman, has said the board accepted the takeover bid because it believed ConnectEast’s shares would be unlikely to get to 55¢ within three years.

Analysts have also been mostly supportive of the deal, arguing that the premium offered by CP2 is fair, while Commonwealth Bank has argued a higher bid is unlikely because of the difficulty of getting all nine investors in the consortium to agree on a revised offer.

However, analysts at Merrill Lynch say the bid is “not overly attractive" given it is only in line with average EV/EBITDA multiples over the past 12 months, and below bid multiples for Intoll and Transurban.

Investors will get a better insight into ConnectEast’s performance when it reports full-year results on Friday. A report from an independent expert, Deloitte, on whether CP2’s offer is fair and reasonable will be provided to investors along with an explanatory memorandum in August.